Sherwin-Williams: A Low-Profile Performer

[1]As long as you trust the data, it’s safe to say the housing industry is on the mend after a long and bumpy few years. Slowly but surely, the numbers are piling up:

Pending sales of existing homes[2] in March improved by 1.5%.

The February Case-Shiller Home Price Index[3] showed a 9.3% jump in housing prices.

Sales of new family homes[4] in March ticked up 1.5% to over 400,000 units after a drop in February.

Mortgage application activity[5], including new homes and refinancings, rose 1.8% in the last week of April.

While there’s a number of ways to play the recovery[6], including directly via homebuilder stocks, I’d like to discuss the merits of an ancillary play: Sherwin-Williams (NYSE:SHW[7]).

While paint and paint supplies are as boring as it gets, they do help fuel one of the more persistent stocks on Wall Street. Not only has SHW been on a nearly uninterrupted upswing of about 160% since late 2011, but it’s also a relentless dividend payer[8]. In fact, its prospects are so strong that Louis Navellier made it his pick for this year’s 10 Best Stocks for 2013 feature[9]. So far so good — it’s leading the pack with 20%-plus gains year-to-date.

And yet, this great story somehow always manages to fly under the radar.

Sherwin-Williams started in 1866 with a $2,000 investment by Henry Sherwin into a buyout of Truman, Dunham & Co., an importer of home decorating supplies and paint. That investment blossomed into a multinational titan that does nearly $10 billion in annual revenues by serving up brands such as Dutch Boy, Minwax, Krylon and Water Seal, in addition to products like caulk, wall and floor coverings, coatings and product finishes.

The company does indeed live up to its slogan, “Cover the Earth.”

Sherwin-Williams’ stock performance bears out the company’s solid and steady growth during the past four years: Total revenues increased from $7 billion to $9.5 billion from 2009 to 2012, while earnings per share has increased from $3.78 to $6.02 in the same period.

As one would expect, SHW’s Paint Stores division has prospered amid a resurgent housing market. FY2012 revenue increased 13.2% year-over-year to $5.4 billion, with a 33% improvement in the group’s net income to $866 million.

Sherwin-Williams’ latest performance is promising, too. Q1 sales improved 1.4% to $2.17 billion. Paint Store revs up 4% to $1.17 billion, with same-store sales 3.2% better, and the segment’s net income rose 15% to $129.7 million. It also has telegraphed a full-year revenue increase in the “mid-single digits,”[10] with earnings expected to improve from 2012’s $6.02 per share to a range of $7.45 to $7.55.

And note that those first-quarter and forward results don’t include the 3,300 stores — and $1.4 billion in revenues — Sherwin-Williams will add after the acquisition of Consorcio Comex of Mexico City. Once the acquisition is completed, SHW will be the largest paint retailer in the Americas.

Investors might turn their nose at Sherwin-Williams’ paltry 1% yield (effective as of the next quarterly dividend, which SHW jacked up from 39 cents to 50 cents quarterly). However, that’s just because SHW’s generosity hasn’t been able to keep up with its rampaging share prices. The company has increased its dividend by roughly 220% in the past decade — problem is, shares have improved by nearly 600%!

That’s an issue even income investors can stomach.

What has helped that payout along the way is a good cash flow situation. SHW’s total cash and FCF during the past three years have averaged just under $850 million, with dividend payments peaking at $160 million in 2012 — a solid coverage ratio. For the first quarter of 2013, SHW ended with cash on hand of $614 million and net operating cash of around $888 million, and it pays out less than 30% of its earnings in dividends, which is below the S&P 500 average and indicates ample room for expansion.

Sherwin-Williams shareholders also get rewarded via stock buybacks — shares outstanding have declined from 108.8 million in 2010 to just over 103 million at the end of 2012. Another 5 million came off during Q1 2013, and the company has further authorization to retire up to 15 million more during the year.

Perhaps my biggest issue with SHW is its understandably high valuation — shares, which are trading at all-time highs, are priced at 30 times earnings. And, of course, that dividend — while consistently and generously growing — isn’t anything to write home about.

If value is a major consideration for you, by all means hold off. But if I were looking for a new long-term holding right now, I’d bite — SHW is a great buy even at current prices.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.